Tax Benefits of Hiring Your Children:
Tax Strategy and Implementation
Strategy: You can take a tax deduction in your business for paying your kids a fair wage for legitimate work and services they provide to your business. Thus, you generate an excellent tax-deductible expense for your income taxes (inside your business) by pushing income to your children. You are shifting income to a lower tax bracket.
Here is the procedure: The IRS allows any sole proprietorship or partnership (LLC) wholly owned by a child’s parents to pay wages to children under age 18 without withholding the payroll taxes and list it as “outside labor,” another expense. NOT Payroll. You do not have to issue a W-2. This is because there are no withholdings, and the penalty for not filing a W-2 is based on the ‘withholdings.’ But see, there aren’t any withholdings; thus, no penalty, and thus the W-2 is perfunctory.
The IRS doesn’t care if there is a W-2 because there is no FICA, FUTA, or SUTA due or withheld. The only time we recommend a W-2 is if you plan to have your child contribute to a Roth IRA. In those instances, we want the IRS computer to match the kid’s contribution to the IRA with their earned income.
CAUTION: If you have an S or a C-Corporation, you do not receive this benefit of avoiding FICA when paying your children under age 18; UNLESS you push the money through a sole prop’ management company.’
Don’t pay your children out of a corporation, or you have to withhold payroll taxes. (IRS Pub No. 15, (2011), p.10). We recommend paying children from a family-owned management company (sole prop). You do this by paying a legitimate management fee to the sole-prop from the S-Corporation and then simply paying the children as “outside labor” (an ‘other expense’) out of the Sole-Proprietorship or Single Member LLC.
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